New Nasdaq Initial Listing Criteria in Effect as of August 2019

26.09.2019 | ZAG/Sullivan Corporate Client Advisory

The Securities and Exchange Commission has recently approved Nasdaq Stock Market LLC’s (“Nasdaq”) proposal to revise Nasdaq’s initial listing application standards to improve liquidity in the market.

Nasdaq’s proposed changes are aimed at ensuring listed companies have sufficient public float and trading interest to promote a liquid trading market—the concern being that less liquid securities trade in a more volatile manner, because a relatively small amount of trading can result in large price swings.

Under the previous rules, to be listed under the Nasdaq Capital Market tier,[1] an applicant company needed, among other requirements under the equity standard, to have a minimum of 1,000,000 “Publicly Held Shares,[2]” $15 million of “Market Value of Publicly Held Shares”[3] and 300 “Round Lot Holders” (i.e. holders of at least 100 shares of company stock) in order to meet the financial and liquidity requirements.

In order to assure adequate liquidity for listed securities, the new Nasdaq rules exclude “Restricted Securities,” which are shares that are not currently freely tradeable (i.e., shares that are subject to resale restrictions for any reason)[4], from the definitions of “Publicly Held Shares,” “Market Value of Publicly Held Shares,” and “Round Lot Holders” in its initial listing application. Prior to this change, a company that wished to list its equity security on any Nasdaq tier, was required to have a minimum number of “Publicly Held Shares,” which often included “restricted securities.” In addition to these new requirements, each applicant company still needs met the other listing requirements such as having a minimum of $5 million of stockholders’ equity, two years of operating history, and a bid price of $4 per share.

Nasdaq is concerned because those illiquid securities may infrequently trade in a more volatile manner and with a wider bid-ask spread, all of which may result in trading at a price that may not reflect their true market value. To address this concern, Nasdaq excluded any “Restricted Securities” from its listing standards, so that the initial listing requirements will include only “unrestricted shares” (i.e., shares that are not considered as “Restricted Securities”).  As a result of the new rules, only freely tranferable securities will be included in the calculation of publicly held shares, market value of publicly held shares and round lot holders to determine whether a company satisfies Nasdaq’s initial listing criteria under these rules. [5]

The new rules also amended the definition of “Round Lot Holder.” The revised definition now requires that at least 50% of a company’s required round lot holders each hold shares with a market value of at least $2,500. Under the previous rules, there was no minimum market value required for round lot holders.

Finally, the new Nasdaq rules require that companies that are currently traded on the over-the-counter markets (“OTC”) have a minimum average daily trading volume over the 30 trading days before the listing of at least 2,000 shares a day (including trading volume of the underlying security on the primary market with respect to an American Depository Receipt (“ADR”)), with trading occurring on at least 16 days out of those 30 trading days, unless such security is listed on Nasdaq in connection with a firm commitment underwritten public offering of at least $4 million.

The new rules mean that companies seeking a new listing on Nasdaq, either through an initial public offering (IPO), an uplisting from the OTC or through listing ADRs, will need to evaluate whether they are able to meet those new liquidity requirements in order to be approved for listing on Nasdaq.

Nasdaq Capital Market: Financial and Liquidity Requirements

RequirementsPrior Equity StandardCurrent Equity Standard
Stockholders’ Equity$5 million$5 million
Market Value of Publicly Held Shares$15 million$15 million, excluding any “Restricted Securities.”
Operating History2 years2 years
Publicly Held Shares1,000,0001,000,000, excluding any “Restricted Securities”
Market Makers33
Bid Price$4$4
Shareholders holding exactly 100 shares (“Round Lot Holders”)300300, however, a holder of only restricted securities would not be considered in the round lot holder count
Minimum Value Requirement for Round Lot Holders$400 per share per Shareholder (in the case of a stock that is trading at the minimum bid price of $4 per share)At least 50% of the 300 Round Lot Holders must each hold Unrestricted Securities with a Market Value of at least $2,500
Average Daily Trading Volume for uplisting OTC companiesNot required30 trading days prior to the listing of at least 2,000 shares a day, with trading occurring on more than half of those 30 days (i.e., at least 16 days), unless the company is listed in connection with a firm commitment underwritten public offering of at least $4 million.

 

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To obtain further information about those proposed changes to the Nasdaq initial listing requirements, please contact the lawyer at ZAG/Sullivan with whom you regularly consult or any of the lawyers listed below.

Oded Har-Even
212 660 5002
ohareven@sullivanlaw.com

Howard E. Berkenblit
617 338 2979
hberkenblit@sullivanlaw.com

Shy S. Baranov
+972 3 7955580
sbaranov@zag-sw.com

David Huberman
+972-3-7955528
davidh@zag-sw.co.il

Ron Ben-Bassat
212 660 5003
rbenbassat@sullivanlaw.com

[1]  The Nasdaq Stock Market has three distinctive tiers: The Nasdaq Global Select Market, The Nasdaq Global Market and The Nasdaq Capital Market. Applicants must satisfy certain financial, liquidity and corporate governance requirements to be approved for listing on any of these market tiers.

[2] “Publicly Held Shares” means shares not held directly or indirectly by an officer, director or any person who is the beneficial owner of more than 10% of the total shares outstanding.

[3]  “Market Value” means the consolidated closing bid price multiplied by the measure to be valued (e.g., a company’s Market Value of Publicly Held Shares is equal to the consolidated closing bid price multiplied by a company’s Publicly Held Shares).

[4] “Restricted Securities” include (1) securities acquired directly or indirectly from the company or an affiliate of the issuer in unregistered offerings such as private placements or Regulation D offering, (2) securities acquired through an employee stock benefit plan or as compensation for professional services, (3) securities acquired in reliance on Regulation S, which cannot be resold within the United States, (4) securities subject to a lockup agreement or a similar contractual restriction, and (5) securities considered “Restricted Securities” under Rule 144.

[5] For ADRs, Nasdaq will consider the unrestricted publicly held shares of the underlying security, and in determining whether shares of the underlying security are restricted for this purpose, Nasdaq will only consider restrictions that prohibit the resale or trading of the underlying security on the foreign issuer’s home country market.

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